Concept of Deemed Speculation under Income Tax Act, 1961

Dear Students/Readers,

Let us start with a small practical scenario

Surana & Surana Pvt. Ltd. has incurred a huge loss on trading in shares of other companies. The entire trading activity was delivery based. It seeks your opinion about the nature of such loss (whether speculative or non-speculative) under the following alternatives-

(i) Trading in shares is not the principle business of a company.
(ii) Trading in shares is the principle business of a company

Primary view

Apparently, one would come to the conclusion that the huge loss incurred by the Surana & Surana Pvt. Ltd. on the trading of shares is of non-speculative nature because the same is arising out of the share trading transactions which are delivery based. And this view is also supported by the definition of speculative transaction enumerated under section 43(5) of the Income Tax Act which reads as under:

"Speculative transaction means a transaction involving a contract for purchase and sale of commodities, including stocks and shares, which is periodically or ultimately settled other than by actual delivery or transfer of commodities or scrips."

Whether the above view is the correct view?

Before coming to any conclusion, one should also refer the explanation to section 73the Income Tax Act which reads as under:

Where any part (or whole) of the business of a company consists in the purchase and sale of shares of other companies, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

However, the above Explanation to section 73 does not apply to the following companies:

(1) Companies whose gross total income consists mainly of income which is chargeable under the heads 'Income from house property', 'Capital gains' and 'Income from other sources';

(2) Companies whose principle business is the business of banking;

(3) Companies whose principle business is the business of trading in share;

(4) Companies whose principle business is the business of granting loans and advances.

Final view on the nature of loss

Finally, what shall be the nature of loss incurred by the Surana&SuranaPvt. Ltd under different alternatives- Speculative or Non-speculative? Do post your answer in the comment box.

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Happy Learning,
All the best.

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